dlg 2019 preliminary results analyst presentation final · 2019 financial highlights 6 beat £700m...

3 March 2020

Today’s speakers

Tim Harris CFO

Penny JamesCEO

2019 highlights

3

Launching share

buyback

£150m

Regular dividend growth

2.9%

Operating profit

£547m

Good financial performance in 2019

Great delivery of our transformation agenda

Clear and focused plans for 2020

See notes on slide 34 and glossary of terms on slides 54 to 57

Return on tangible equity

20.8%

We have clear vision, purpose and strategic objectives

4

Sustainability pillars

Customers

People

Society

Planet

Governance

Values

Do theright thing

Aim higher

Takeownership

Say it likeit is

Work together

Bring all of yourself to work

Strategicobjectives

Best at direct

Win on price comparison websites

Extend our reach

Technical edge

Nimble and cost efficient

Great people

We want to

create a

world where

insurance

is personal,

inclusive

and a force

for good.

We help

people carry

on with their

lives, giving

them peace

of mind now

and in the

future.

Tim Harris CFO

2019 financial highlights

6

Beat £700m expense target

£694m

Operating expenses

Direct own brands growth

1.4%

To 7.3m in–force policies

Strong shareholder

returns

£447m

£297m regular dividend £150m share buy-back

SCR coverage 165%3

Delivered our COR target

93.5%1

Reported COR 92.2%

Grew current year

contribution2

39%

Of normalised operating profit from current year2

1. Normalised for weather, excluding impact from change to Ogden discount rate2. Group operating profit normalised for weather, and Ogden rate changes, excludes restructuring and one-off costs3. Solvency capital ratio after capital distribution, figures estimated and based on partial internal model (PIM) output as at 31 December 2019See notes on slide 34 and glossary of terms on slides 54 to 57

7

• Gross written premiums broadly stable

• Underwriting result lower than 2018 due to lower prior year releases, in part due to Ogden

• Combined operating ratio (normalised) was towards the lower end of our 93%-95% target range

• RoTE of 20.8%, ahead of the 15% target

2019 results summaryDelivering our ambition

Group results £m 20192018

restatedChange

Gross written premiums 3,203 3,212 (0.3%)

Of which direct own brands 2,228 2,229 0.0%

Net earned premiums 2,985 3,090 (3.4%)

Operating expenses (694) (718) 3.3%

Underwriting result 232 260 (10.7%)

Of which prior year releases 295 404 (27.2%)

Instalment and other income 180 192 (6.1%)

Investment return 135 155 (12.9%)

Operating profit 547 606 (9.8%)

Restructuring and one –off costs (11) - -

Combined operating ratio (COR) 92.2% 91.6% (0.6pt)

COR adjusted for normal weather and Ogden rate changes

93.5% 93.3% (0.2pts)

RoTE 20.8% 21.6% (0.8pts)

Significant items £m 2019 2018

Ogden discount rate change (17) 55

Bristol office sale - 10

Investment gains 10 26

Total (7) 91

Event weather (6) (75)


8

• Current year attritional loss improved by 1.0 percentage point primarily driven by escape of water in Home with small improvements in Motor, RoPL and Commercial

• Major weather events totalled £6m in 2019 compared with £75m in 2018

• Prior year releases reduced by £110m but continued to be significant at £295m. £17m increase in reserves in 2019 due to change in Ogden discount rate (£51m release in 2018)

• Expense ratio flat as lower costs were offset by lower earned premiums

• Commission ratio increases driven by higher profit share payments and higher PCW volumes

2019 group ratiosImproved current year loss ratio

Group ratios 20192018

restated

Current year attritional loss ratio 71.6% 72.6%

Major weather events 0.2% 2.4%

Prior year releases (9.9%) (13.1%)

Loss ratio 61.9% 61.9%

Expense ratio 23.2% 23.2%

Commission ratio 7.1% 6.5%

Combined operating ratio 92.2% 91.6%

Combined operating ratio adjusted for normal weather and Ogden

93.5% 93.3%


9

• Motor own brands in-force policies stabilised in Q3 and returned to growth in Q4

• Home own brand in-force policies were stable in Q4

• Green Flag delivered strong growth throughout the year, passing the 1 million milestone in Q3

• Commercial own brands includes Direct Line for Business and products sold under the Churchill brand. Direct Line for Business continued to grow following further product launches on its new digital trading platform

In-force policiesMotor returned to growth in H2 2019

In-force policiesDec ‘19 000’s

Change %

Motor own brands 3,921 (0.7%)

Home own brands 1,765 (1.3%)

Green Flag 1,063 13.7%

Commercial own brands 541 5.3%

Direct own brands 7,290 1.4%

Motor and Home partners 951 (5.5%)

Other rescue and personal lines 6,314 (4.9%)

NIG and other 234 (2.9%)

Total Group 14,789 (1.9%)


MotorStrong result reflects underwriting discipline

10

Key ratios 2019 2018 restated

Current year loss ratio 81.2% 81.4%

Prior year ratio (11.9%) (17.9%)




COR 94.8% 88.6%

Trading metrics 2019 2018

Change in GWP (1.2%) 0.0%

Change in price 3.1% 0.6%

Change in risk mix (3.7%) (1.5%)

Change in IFPs (1.2%) 1.9%

• Pricing actions reflect underwriting discipline and initiatives supporting new business competitiveness

• Reduction in risk mix partly reflects actions taken on application fraud

• Underlying claims severity inflation remained towards the top of the 3%-5% range

• Claims frequency was below expectations

79

175

135

13789

106

2019 2018

Motor operating profit £m

Investment return

Instalment and other income

Underwriting profit

418

303

• Current year loss ratio broadly stable due to lower frequency and actions taken on application fraud

• Prior year releases were £96m lower as 2018 included a £48m prior year release due to change in Ogden discount rate. 2019 includes £16m strengthening

• Higher commission ratio reflects the earn through of higher PCW volumes

£276m PY release

£181m PY release


MotorMarket pricing shows some improvement

11

UK Motor premiums1

1. ABI UK Motor premiums year on year adjusted to remove impact of changes to IPT

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2014 2015 2016 2017 2018 2019

Damage c. 59%

Small BI c. 23%

Large BI c. 18%

Motor claimsVertical integration provides greater visibility and control

12

PerilProportion of

gross claims costFrequency Severity

• 2019 frequency was better than our expectations and more in line with 2017. 2018 was elevated due to weather conditions

• We’ve taken actions on application fraud and our claims fraud detection rates have increased

• c. 50% of damage repairs are carried out in-house through our network of 21 owned repair centres

• Managing third party claims and supply chain reduces claims leakage

Greater fraud detection

21 owned accident repair centres

Strong feedback loops

Consistent reduction in risk

mix

Underlying experience versus our long-term expectation


HomeStrong result reflects benign weather and actions on EoW

13

Key ratios 2019 2018 restated

Current year attritionalloss ratio

53.5% 57.0%

Event weather 0.5% 9.7%





COR 80.3% 93.5%

COR normalised for weather

86.9% 91.6%

Trading metrics (Own brands)

2019 2018

Change in GWP (1.2%) 0.7%

Change in price 2.0% 3.5%

Change in risk mix (2.7%) (3.1%)

Change in IFPs (1.3%) (0.3%)

113

43

21

25

17

16

2019 2018

Home operating profit £m

Investment return


Underwriting profit

151

84

• 3.5 point improvement in current year attritional loss ratio reflects actions taken on Escape of Water (EoW) claims and benign weather

• Increase in prior year releases due to favourable development in EoW

• Event weather was £3m versus £65m in 2018

• Priced ahead of the market on new business

• Retention continued to be strong

• Own brand average premiums were 0.7% lower than 2018 reflecting changes in risk mix and tenure

£41m PY release

£33m PY release

£3m Event

weather

£65m Event

weather


Rescue and other personal linesRescue growth offset by losses in other personal lines

14

45

40

2019 2018

Rescue operating profit £m

20 21

14

1865

2019 2018

RoPL operating profit £m

Investment return


Underwriting profit

• Rescue is the largest product within RoPL

• Increase in Rescue profit driven by operational improvements and better claims experience

• Other personal lines include Pet, Travel and a mid-high net worth business, UK Select

• Reduction in other personal lines due to lower prior year releases in Travel and UK Select and higher large loss severity in UK Select

• RoPL maintained a COR of 95%

4439

COR

81.5% 85.0%

COR

95.4% 95.0%


CommercialImproved current year performance

15

21 21

1012

24

28

2019 2018

Operating profit £m

Investment return


Underwriting profit

60

55

• Focus on improving margins with strong rate carried in NIG

• Current year loss ratio improvement helped offset lower contribution from prior year releases

• Event weather below expectations; £3m in 2019 (2018 £10m)

Key ratios 20192018

restated

Current year attritional loss ratio 65.6% 66.8%

Event weather 0.7% 2.1%





COR 95.7% 95.4%

COR normalised for weather 99.4% 97.7%£65m PY release

£79m PY release


£3m Event

weather

£10m Event

weather

Movement in operating expenses

£718m

£626m£615m

£694m£92m

£14m

£25m

£79m

2018 Operatingexpenses (OpEx)

Amortisation &depreciation

2018 OpEx excludingamortisation &depreciation

Increase in levies Cost reductions 2019 OpEx excludingamortisation &depreciation

Amortisation &depreciation

2019 Operatingexpenses (OpEx)

<£700m

The changing shape and quality of our earningsReducing operating expenses; targeting £50m reduction by 20211

16

Cost targets supported by Restructuring and one-off costs of approximately £60m across 2019 and 2020

£11m Restructuring costs in 2019

£11m reduction

1. Applies to operating expenses excluding amortisation and depreciation and restructuring and one-off costs between year ended 31 December 2018 and year ending 31 December 2021See notes on slide 34 and glossary of terms on slides 54 to 57

£11m reduction

The changing shape and quality of our earningsReducing the expense ratio; targeting 20% by 2023

17

23.5%

23.2% 23.2%1.8%

2017 2018 2019 2023

Expense ratio

Expense ratio Impairment

c. 20%

25.3%

Expense ratio was flat in 2019 as lower costs were offset by lower earned premiums


Investment return2.1% net investment income yield

18

• Total investment return of £135m, £20m lower than prior year principally due to lower realised gains including property fair value

• £4m reduction in net investment income driven by lower assets under management

• Net investment yield of 2.1%, 0.1pts higher than 2018

Group investment returns 2019 £m

2018 £m

Investment income 146.4 159.2

Hedging to sterling floating rate (22.1) (30.8)

Net investment income 124.3 128.4

Net realised and unrealised gains ex. hedging

10.3 26.2

Of which property fair value (6.2) 12.7

Total investment return 134.6 154.6

Available for sale reserve net of tax

47.5 (36.8)

2.3% 2.2% 2.1% 2.0% 2.1%

2.9%

2.6% 2.6%2.4%

2.2%

Dec 15 Dec-16 Dec-17 Dec-18 Dec-19

Group investment yields

Net investment income yield

Investment return yield

We expect to achieve net investment income yield of approx. 2.0% in 2020 with minimal gains

61.9%

6.6%

1.8%1.7%

4.7%

3.4%

15.1%

4.9%

Group assets under management

AFS investmentgrade credit

High yield

Private placements

Sovereign

Infrastructure debt

Commercial realestate loans

Cash andequivalents

Investment property


30%36% 39%

50%

70% 64% 61%50%

2017 2018 2019 2021 target

Normalised operating profit breakdown1,2

Prior yearcontribution

Current yearcontribution

Changing shape and quality of our earningsGrowth in contribution from current year profit

191. Group operating profit normalised for weather, and Ogden rate changes, excluding restructuring and one-off costs2. 2017 and 2018 restated having adjusted for Ogden current year and the removal of restructuring and one-off costsSee notes on slide 34 and glossary of terms on slides 54 to 57

Capital and balance sheet management Strong conversion of earnings to distributable capital

201. Figures estimated and based on partial internal model (PIM) output as at 31 December 2019See notes on slide 34 and glossary of terms on slides 54 to 57

Movement in capital surplus1

Capital generation Capital management

We expect capital expenditure to be approx. £150m in 2020 and around £100m in 2021

£0.89bn £0.85bn

£0.60bn£0.06bn

£0.06bn

£0.19bn

£0.30bn

£0.15bn

1 Jan 2019openingcapitalsurplus

Operatingcapital

generation

Marketmovements

Change inSCR

Capitalexpenditure

Regulardividends

Sharebuyback

31 Dec 2019closing capital

surplus

Capital and balance sheet management Solvency ratio strong at 165% after capital distributions

21

£1.4

0b

n

£1.3

9b

n

£1.2

6b

n

£1.3

2b

n

£0

.91b

n

£0

.91b

n

£0

.89

bn

£0

.85

bn

165% 165% 170% 165%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

Dec 16 Dec 17 Dec 18 Dec 19

Solvency ratio1

Required capital £bn Surplus capital £bn

197 189 200

279 288 297

210

121137

205

114

411

150£407m

£721m

£337m

£484m

£401m£447m

2014 2015 2016 2017 2018 2019

Capital distributions

Regular dividends £m Special dividends £m

Int'l disposal £m Share buyback £m

Buybacks

Announcing a £150m share buyback

Final regular dividend of 14.4p pence, an increase

of 2.9% compared to 2018

Regular dividend


Target range

Financial outlookReiterating our targets

1. Applies to operating expenses before amortisation and depreciation and restructuring and one-off costs between year ended 31 December 2018 and year ending 31 December 20212. Normalised for weather and Ogden rate changes, excluding restructuring and one-off costs3. Normalised for weatherSee notes on slide 34 and glossary of terms on slides 54 to 57

22

Current year operating profit

At least 50% by 20212

Operating expenses

£50m reduction by

20211

Expense ratio of 20% in 2023

Return on tangible equity

(ROTE)

At least 15% per annum over the

long term

Combined operating ratio

93% - 95% throughout the medium term3

Penny JamesCEO

Focused on delivering good outcomes for all key stakeholders

241. Net promotor score on an aggregated 12 months rolling basis with 2013 indexed to 100See notes on slide 34 and glossary of terms on slides 54 to 57

DLG has a highly engaged workforceHighly engaged, %

60

7378

8178

2015 2016 2017 2018 2019

Driving improved net promotor scoresDirect Line NPS1, indexed to 2013

118129

144 146155

2015 2016 2017 2018 2019

Leading to growth across our direct own brands In-force policies, 000s

6,264

6,563

6,909

7,1887,290

2015 2016 2017 2018 2019

Driving sustainable returns to shareholders Capital returns, £m

310

336

484

401447

411

2015 2016 2017 2018 2019

Inte

rna

tio

na

ld

isp

osa

l

The next horizon for DLG Business transformation

Our plans land us

(about) here

25

Targeting margin improvement in

portfolio as full benefits of technology realised

More competitive and agile business to deliver the full potential of the

Group enabling it to take market share and innovate faster to grow

Required significant capital expenditure

We are (about)

here now

Technology transformation

Business transformation

Business growth

Technology transformation

Claims transformation

Finance transformation

Building a better business Technology a key enabler across brands, channels and products

Improved sales and service Greater pricing accuracy

Brilliant claims experience

MotorMotor & Home

New customer service and back office support tools

New end to end digital platform

New digital platform

New set of customer

systems under constructionNew pricing engine

New brand, new pricing model, new operating

model

New pricing and underwriting

tools

26

Privilege Motor live, Churchill and Direct Line to follow in

2020

Launched in 2019

New claims system built

Launched Trades-person

Rolled-out in 2019

Launched in 2019

Rescue Micro & SME Commercial Travel

Progressing well

Clear plans

Good progress

Good progress across our strategic objectivesEasy to use and accessible everywhere

27

Best at Direct

A direct relationship with our customers provides opportunity for profitable growth by meeting a broader set of

customer needs; and the foundation for future product and service innovation

� Direct Line: Best ever NPS

� Green Flag: Passed 1 million policies

� Direct Line for Business: New Tradesperson proposition launched

Why?

Win on PCWs

Price comparison websites will continue to be the biggest market for

new business and therefore our primary route for profitable growth

� Privilege: Motor live on new platform and available on 4 PCWs

� Churchill: Relaunched brand as PCW first

� Darwin: New Motor proposition launched on 2 PCWs

Extend our reach

Our new platform makes it easier for us to onboard new books of business. We will use this to explore inorganic growth

opportunities through partnerships and acquisitions

� NatWest Travel: New platform rolled-out

� RBS Home: Grew 3 year proposition

� Starling Bank and YouMeCar: New partnerships

Why? Why?

2019 Achievements 2019 Achievements 2019 Achievements

Good progress across our strategic objectivesKey enablers

28

Technical edge

To create a great experience for our customers and sustainable competitive advantage for us by better utilising our

scale advantage in repair, data and claims insight and management

� Motor: New pricing models and rating factors deployed

� Motor: Extended owned repair centres to 21

� Home: Escape of Water cost control


To bring our cost base in line with the market to compete better, in particular

through PCWs and partnerships. We will introduce new ways of working to

exploit our advantages within each product and channel

� Costs: Delivered 2019 cost target

� Agile: Embedded new ways of working across a number of areas

� Organisational change: programme underway

Great people

As disruption in our market increases, we need to become brilliant at

innovation and change. We can only do this by empowering and developing the

best people.

� Women in Finance: 30% target achieved

� Talent: First cohort of graduates completed 3 year training programme

� Diversity: Neurodiversity, BAME, Disability and carers

Why? Why? Why?

2019 Achievements 2019 Achievements 2019 Achievements2019 Achievements 2019 Achievements 2019 Achievements

Clear priorities as we go into 2020

29

Technical edge


Great people

Best at Direct

Win on PCWs

Extend our reach

• Continue the development and roll-out of our ambitious and complex technology change

• Prepare Direct Line and Churchill motor new business for new platform

• Launch Darwin motor on two more PCWs

• Launch Van on new Direct Line for Business platform

• Begin roll-out of new Green Flag claims system

• Continuing the re-engineering of our technology platform

• Launch and embed new ways of working

• Continue focus on delivering cost saves to deliver cost targets

• Launch new Direct Line creative campaign

Key investment points

30

Strengths that are hard to

replicate

Our customers and our people are at the heart of our business

Delivering tools and

organisational change to increase

competitiveness

Continuing our journey to

improve quality of earnings

Strong balance sheet with

further opportunities to

improve its effectiveness

Closing messages

31

Good financial performance in 2019

Great delivery of our transformation agenda

Clear and focused plans for 2020

Questions

32

APPENDIXAPPENDIX

Notes to financial disclosures

34

1. Results for the year ended 31 December 2018 have been restated to reflect the fully retrospective adoption of IFRS 16 ‘Leases’. See note 23 to the consolidated financial statements in the preliminary results. For more information.

2. In-force policies, including direct own brands, as at 31 December 2018 have been restated to include 41,000 policies omitted from previously reported amounts.

3. Direct own brands include in-force policies for Home and Motor under the Direct Line, Churchill, Darwin and Privilege brands, Rescue policies under the Green Flag brand and Commercial policies under the Direct Line for Business and commercial products sold under the Churchill brand.

4. See glossary of terms on pages 54 to 57

5. The Group’s dividend policy includes an expectation that generally one-third of the regular annual dividend will be paid in the third quarter as an interim dividend and two-thirds will be paid as a final dividend in the second quarter of the following year.

Sustainability pillars – materiality matrix

35

Our customers

Our society

Our planet

Our people

Our governance

Good progress across our five sustainability pillars

36

Sustainability pillars

Customers

People

Society

Planet

Governance

2019 Achievements

• NPS score

• Engagement, mental health

• ESG rating

• Recycling and efficiency

• Robust, board changes

Customers

People

Society

Planet

Governance

• Technology upgrades providing greater value and ease for customers

• Actively engaged with the FCA and support a level playing field

• Rebranded Churchill

• Mental health first aiders on every floor in every site

• Diversity Network Alliance promoting diversity and inclusion

• ‘Thrive’ women’s network expanded and helping support women’s careers

• Working with the Parliamentary Advisory Council for Transport Safety (PACTS) on road safety

• Working with FiveAI and TRL to trial autonomous vehicles

• ‘One Day’ volunteering during company time, supporting local communities

• 100% of investment grade corporate bond mandates have an ESG rating of ‘A’

• Recycled 98% of our total waste and 100% of our electricity is from renewal sources

• Working with the Carbon Trust to set scientific based targets

• Supplier prompt payment code

• Named Executives responsible for customer pricing

• Changes made to the Directors’ Remuneration Policy

37

Gross written premiums

Gross Written premiums 2019 £m

Change %

Motor own brands 1,592 (1.1%)

Home own brands 408 (1.2%)

Green Flag 79 13.5%

Commercial own brands 149 8.3%

Direct own brands 2,228 (0.0%)

Motor and Home partners 239 (7.0%)

Other rescue and personal lines 357 1.1%

NIG and other 380 1.7%

Total Group 3,203 (0.3%)

(4.0%)(4.8%)

0.3%

4.7%

0.7%

(1.4%)

(3.1%)

(0.6%)

-5.0%

0.0%

5.0%

Q1 2019 Q2 2019 Q3 2019 Q4 2019

Motor and Home own brands year on year quarterly trend

Motor Home

• Motor premiums returned to growth in H2 2019

• Home own brand premiums were 1.2% lower reflecting risk mix and channel shift towards PCW

• Green Flag delivered its third successive year of double-digit growth

• Commercial direct grew premiums by 8.3%


Motor

38

20192018

restated

In-force policies (000s) 4,043 4,094

Own brand in-force policies 3,921 3,950

Partnerships in-force policies 122 144

Gross written premium £m 1,652 1,671

Net earned premium £m 1,508 1,542

Loss ratio – current year 81.2% 81.4%

Loss ratio – prior years (11.9%) (17.9%)





Underwriting profit £m 79 175

Of which prior year releases £m 181 276

Instalment and other income £m 135 137

Investment return £m 89 106

Operating profit £m 303 418


Home

39

2019 2018

restated


Own brand in-force policies (000s) 1,765 1,789

Partnerships in-force policies (000s) 829 862

Gross written premium £m 587 607

Net earned premium £m 574 668

Loss ratio – current year attritional 53.5% 57.0%


Loss ratio – major weather events 0.5% 9.7%





COR Normalised for weather 86.9% 91.6%






Normal weather assumed to be £46m in 2020


Rescue and other personal lines

40

Rescue and other personal lines 20192018

restated


Rescue (000s) 3,450 3,532

Travel (000s) 3,648 3,759

Pet (000s) 157 156

Other personal lines (000s) 122 126



Loss ratio – current year 68.7% 70.7%









Rescue 20192018

restated


Of which Green Flag (000s) 1,063 935





Commercial

41

2019 2018

restated

In-force policies (000s) 775 755

Own brands (000s) 541 514

NIG and other (000s) 234 241



Loss ratio – current year attritional 65.6% 66.8%


Loss ratio – major weather events 0.7% 2.1%





COR Normalised for weather 99.4% 97.7%






Normal weather assumed to be £18m in 2020


£606m

£554m

£201m

£2m£55m

£353m

2018 operatingprofit

Adjustment fornormal weather

Adjustment forOgden

Normalisedoperating profit

Prior year 2018 normalisedcurrent year

operating profit

£547m

£509m

£198m

£55m £17m

£311m

2019 operatingprofit

Adjustment fornormal weather

Adjustment forOgden

Normalisedoperating profit

Prior year 2019 normalisedcurrent year

operating profit

Current year contribution to operating profit

42

Ogden rate changes 31 Dec 2019 31 Dec 2018

Current year impact £m - 4

Prior year impact £m (17) 51

Total £m (17) 55

2019 normalised operating profit1 2018 normalised operating profit1,2

B A B A

A / B = 39% A / B = 36%

1. Group operating profit normalised for weather, and Ogden rate changes, excludes restructuring and one-off costs2. 2017 and 2018 restated having adjusted for Ogden current year and the removal of restructuring and one-off costsSee notes on slide 34 and glossary of terms on slides 54 to 57

43

Balance sheet

Group balance sheet £m Dec-19Dec-18

restated

Goodwill and other intangible assets 703 567

Financial investments and cash 5,914 6,214

Reinsurance assets 1,251 1,209

Other assets 1,566 1,545

Total Assets 9,434 9,535

Unearned premium reserve 1,506 1,506

Insurance liabilities 3,820 4,006

Other liabilities 1,118 1,119

Total Liabilities 6,444 6,631

Shareholders’ equity 2,644 2,558

Tier 1 notes 346 346

Total Equity 2,990 2,905

• Investment in new technology reflected in higher intangibles

• Simple debt structure and low leverage

44

Assets under management

6,8196,581 6,709

6,1645,943

3,603 3,3883,145

2,9012,670

Dec 15 Dec-16 Dec-17 Dec-18 Dec-19

Group assets under management, £m

Assets under management Net claims liabilities


Investment portfolio

45

As at 31 Dec 2019

U K Insurance

target allocation

U K Insurance

current holding

Total Group income

yield

Total Group interest rate

duration (years)

Investment grade (incl private placements) 68.0% 64.3% 2.3% 2.84

High yield 6.0% 6.9% 5.4% 1.51

Credit 74.0% 71.2% 2.6% 2.71

Sovereign 5.0% 1.7% 1.8% 0.64

Total debt securities 79.0% 72.9% 2.5% 2.67

Infrastructure debt 5.0% 4.9% 2.5% 0.19

Commercial real estate loans 4.0% 3.7% 3.4% -

Investment property 5.0% 5.1% 5.3% -

Cash and cash equivalents 7.0% 13.4% 0.8% 0.00

Total 100.0% 100.0% 2.4% 1.95

• 2.8% of total debt securities rated as ‘AAA’ and 58.6% rated as ‘AA’ or ‘A’

• Average duration of total debt securities was 2.5 years


Reinsurance

46

• Cover renewed on 1 July 2019

• Retained deductible of 15.6% of gross earned premium (c. £132m)

• Limit is 133.6% of gross earned premium, (c. £1,132m), equivalent to a modelled 1 in 200 year loss

• Cover has one full reinstatement for all programme and additional reinstatement up to £570m

• Placed with a panel of reinsurers who are all at least ‘A-’ rated and c.60% placed on 3 year basis (at July 2017) at a fixed price (reinsurance rate online)

• Cover renewed on 1 January 2020

• Retained £1m deductible (indexed) with 100% placement of all layers

• Cover is unlimited in size and has an unlimited amount of cover reinstatements

• Placed 100% on a traditional, uncapitalised basis

• Placed with a panel of reinsurers who are at least ‘A+’ rated

Accident year

Deductible £m

2020 1

2019 1

2018 11

2017 1

2016 1

2015 1

2014 1

2013 3

2012 3

2011 3

2010 10

Motor Excess of Loss (unlimited) Property catastrophe

Accident year

Limit £mDeductible

£m

2019/20 c. 1,132 c. 132

2018/19 c. 1,205 c. 139

2017/18 c. 1,275 c. 150

2016/18 1,250 c. 150

2015/16 1,350 c. 150

2014/15 1,400 c. 150

2013/14 1,300 c. 150

1. Partial placement on lower layers. For 2018 90% of the first layer (£2m excess £1m) was placed with 10% retained

IFRS to Solvency II bridge

47

Reconciliation of IFRS shareholders’ equity to solvency II own funds1


£2.64bn

£1.46bn

£2.17bn

£0.70bn£0.06bn

£0.07bn

£0.35bn

£0.36bn

£0.26bn£0.09bn

Totalshareholders'

equity

Goodwill andintangibles

Change invaluation of

technicalprovisions

Other asset andliability

adjustments

Forseeableshareholderdistributions

Tier 1 capital -unrestricted

Tier 1 capital -restricted

Tier 2 capital(subordinated

debt)

Tier 3 capital(deferred tax)

Total own funds

Solvency sensitivity analysis

48

165%

158%

156%

156%

157%

156%

166%

40% 60% 80% 100% 120% 140% 160% 180%

140% - 180% Risk appetite

range

1. Only includes the impact on AFS assets (excludes illiquid assets such as infrastructure debt) and assumes no change to the SCR2. The PPO real discount rate used in an actuarial judgement which is reviewed annually based on the economic outlook for wage inflation relative to the EIOPA discount rate curve

100 bps increase in credit spreads1

Change in reserving basis for PPOs to use a real discount rate of minus 1%2

One-off catastrophe loss based on extensive flooding of the River Thames

One-off catastrophe loss equivalent to the 1990 storm

Motor small BI deterioration equivalent to accident years 2008 and 2009

31 December 2019 solvency capital ratio

100 bps decrease in interest rates with no change in the PPO discount rate

£1,991m

£2,362m

£1,941m

£420m £84m

£134m

£421m

31 Dec 2018 Net income Movement inAFS

Other 31 Dec 2019 preFY dividends

Dividends andappropriations

31 Dec 2019

Book value and TNAV

49

31 Dec 2019

31 Dec 2018

Net asset value per share (pence)

193.4 187.5

Tangible net asset value per share (pence)

142.0 145.9

Movement in tangible net asset value

Total unrealised AFS reserves of £47.5m (net of tax) as at 31 December 2019

+18.6%

145.9p 142.0p


Solvency capital requirements by risk type

50

31 Dec 2019

31 Dec 2018

Comments

Non-Life underwriting risk 1,029 892

- Premium risk 445 331Reflects restructuring costs in 2020

- Reserve risk 319 306 Includes books in run-off

- Catastrophe risk 258 238Home and Commercial driven

- Other underwriting 8 17 Risk margin volatility

Default risk 24 17

Market risk 135 232 Lower AUM and volatility

Operational risk 97 91

U K Insurance solvency capital requirement 1,284 1,232

Other entity Solvency capital requirement 32 33

Group solvency capital requirement 1,316 1,294

80%

2%

10%

8%

Post diversification

Non-Life underwriting risk Default risk

Market risk Operational risk

1. Figures estimated and based on partial internal model (PIM) output as at 31 December 2019

Return on tangible equity and earnings per share calculations

51

2019 £m

2018 £m

restated

Profit before tax 509.7 580.5

Add back: Restructuring and one-off costs

11.2 -

Coupon payments in respect of Tier 1 notes

(16.6) (16.6)

Adjusted profit before tax 504.3 563.9

Tax charge - (108.5)

Tax charge (using the 2019 UK standard tax rate of 19%)

(95.8) -

Adjusted profit after tax 408.5 455.4

Opening shareholders tangible equity 1,991.4 2,230.8

Closing shareholders’ tangible equity 1,941.1 1,991.4

Average shareholders’ tangible equity 1,966.3 2,111.1

RoTE 20.8% 21.6%

2019 £m

2018 £m

restated

Profit after tax 419.9 472.0

Coupon payments in respect of Tier 1 notes

(16.6) (16.6)

Profit for the calculation of EPS 403.3 455.4

Weighted average number of shares (millions)

1,367.2 1,366.5

Basic earnings per share (pence) 29.5 33.3

Return on tangible equity (RoTE) Earnings per share (EPS)


2019 segmental results

52

(£m) Motor HomeRescue and other

personal linesCommercial Total Group

GWP 1,651.6 586.6 436.0 528.9 3,203.1

Net earned premium 1,507.7 573.6 425.2 478.4 2,984.9

Net insurance claims (1,043.3) (268.4) (284.4) (251.5) (1,847.6)

Commission expenses (39.9) (55.7) (27.2) (88.7) (211.5)

Operating expenses (345.6) (136.7) (94.0) (117.4) (693.7)

Underwriting profit / (loss) 78.9 112.8 19.6 20.8 232.1

Investment return 88.6 16.7 5.6 23.7 134.6

Instalment and other operating income 135.1 21.1 13.9 10.1 180.2

Operating profit / (loss) 302.6 150.6 39.1 54.6 546.9

Restructuring and one-off costs - - - - (11.2)

Operating profit after restructuring and one-off costs - - - - 535.7

Finance costs - - - - (26.0)

Profit before tax - - - - 509.7

Tax - - - - (89.8)

Profit after tax - - - - 419.9

Loss ratio – current year 81.2% 54.0% 68.7% 66.3% 71.8%

Loss ratio – prior year (11.9%) (7.2%) (1.8%) (13.6%) (9.9%)

Commission ratio 2.6% 9.7% 6.4% 18.5% 7.1%

Expense ratio 22.9% 23.8% 22.1% 24.5% 23.2%

Combined operating ratio 94.8% 80.3% 95.4% 95.7% 92.2%


2018 (restated) segmental results

53

(£m) Motor HomeRescue and other

personal linesCommercial Total Group

GWP 1,671.2 606.9 422.8 511.0 3,211.9

Net earned premium 1,541.8 667.8 414.7 465.2 3,089.5

Net insurance claims (979.3) (413.3) (277.2) (241.3) (1,911.1)

Commission expenses (30.9) (62.6) (19.0) (87.9) (200.4)

Operating expenses (356.9) (148.5) (98.0) (114.8) (718.2)

Underwriting profit / (loss) 174.7 43.4 20.5 21.2 259.8

Investment return 105.9 15.9 5.2 27.6 154.6

Instalment and other operating income 137.5 24.6 18.3 11.6 192.0

Operating profit / (loss) 418.1 83.9 44.0 60.4 606.4

Restructuring and one-off costs - - - - -

Operating profit after restructuring and one-off costs - - - - 606.4

Finance costs - - - - (25.9)

Profit before tax - - - - 580.5

Tax - - - - (108.5)

Profit after tax - - - - 472.0

Loss ratio – current year 81.4% 66.7% 70.7% 68.9% 75.0%

Loss ratio – prior year (17.9%) (4.9%) (3.9%) (17.1%) (13.1%)

Commission ratio 2.0% 9.4% 4.6% 18.9% 6.5%

Expense ratio 23.1% 22.3% 23.6% 24.7% 23.2%

Combined operating ratio 88.6% 93.5% 95.0% 95.4% 91.6%


Glossary of terms

54

Term Definition

Actuarial best estimate(“ABE”)

The probability-weighted average of all future claims and cost scenarios. It is calculated using historical data, actuarial methods and judgement. A best estimate of reserves will therefore normally include no margin for optimism or, conversely, caution.

Assets undermanagement (“AUM”)

This represents all assets management or administered by or on behalf of the Group, including those assets managed by third parties.

Available-for-sale (“AFS”)Investment

Available-for-sale investments are non-derivative financial assets that designated as such, or are not classified as loans and receivables, held to maturity, or financial assets at fair value through profit or loss.

Average writtenpremium

The total written premium at inception divided by the number of policies.

CapitalThe funds invested in the Group, including funds invested by shareholders and Tier 1 notes. In addition, subordinated loan capital in the Group’s balance sheet is classified as Tier 2 capital for Solvency II purposes.

Claims frequency The number of claims divided by the number of policies per year.

Combined operating ratioThe sum of the loss, commission and expense ratios. The ratio measures the amount of claims costs, commission and operating expenses, compared to net earned premium generated. A ratio of less than 100% indicates profitable underwriting. Normalisedcombined operating ratio adjusts loss and commission ratios for weather and changes to the Ogden discount rate.

Commission expenses Payments to brokers, partners and price comparison websites for generating business.

Commission ratio The ratio of commission expense divided by net earned premium.

Company Direct Line Insurance Group plc (the “Company”).

Current-year attritionalloss ratio

The loss ratio for the current accident year, excluding the movement of claims reserves relating to previous accident years and claims relating to major weather events.

Current-year combined operating ratio

This is calculated using the combined operating ratio less movement in prior-year reserves.

Glossary of terms

55

Term Definition

Current-year operating profit This is calculated by total operating profit less movement in prior-year reserves.

Direct own brandsDirect own brands include Home and Motor under the Direct Line, Churchill and Privilege brands, Rescue under the Green Flag brand and Commercial under the Direct Line for Business and commercial products sold under the Churchill brand.

Earnings per shareThe amount of the Group’s profit after deduction of the Tier 1 coupon payments allocated to each Ordinary Share of the Company.

Expense ratio The ratio of operating expenses divided by net earned premium.

Finance costs The cost of servicing the Group’s external borrowings and includes the interest on ROU assets.

Financial Conduct Authority (“FCA”) An independent body responsible for regulating the UK's financial services industry

Financial leverage ratio Tier 1 notes and financial debt (subordinated guaranteed dated notes) as a percentage of total capital employed.

Gross written premium The total premiums from contracts that were accepted during the period.

Group Direct Line Insurance Group plc and its subsidiaries (“Direct Line Group” or the “Group”).

In-force policies The number of policies on a given date that are active and against which the Group will pay, following a valid insurance claim.

Insurance liabilitiesThis comprises insurance claims reserves and claims handling provision, which the Group maintains to meet current and future claims.

International Accounting Standards Board (“IASB”)

A not-for-profit public interest organisation that is overseen by a monitoring board of public authorities. It develops IFRS standards that aim to make worldwide markets transparent, accountable and efficient.

Investment income yieldThe income earned from the investment portfolio, recognised through the income statement during the period divided by the average assets under management (“AUM”). This excludes unrealised and realised gains and losses, impairments, and fair value adjustments. The average AUM derives from the period’s opening and closing balances for the total Group.

Investment returnThe investment return earned from the investment portfolio, including unrealised and realised gains and losses, impairments and fair value adjustments.

Glossary of terms

56

Term Definition

Investment return yield The return divided by the average AUM. The average AUM derives from the period’s opening and closing balances.

Loss ratio Net insurance claims divided by net earned premium.

Management’s best estimate These reserves are based on management’s best estimate, which includes a prudence margin that exceeds the internal ABE.

Net asset valueThe difference between the Group’s total assets and total liabilities, calculated by subtracting total liabilities (including Tier 1 notes) from total assets.

Net earned premiumThe element of gross earned premium less reinsurance premium ceded for the period where insurance cover has already been provided.

Net insurance claimsThe cost of claims incurred in the period less any claims costs recovered under reinsurance contracts. It includes claims payments and movements in claims reserves.

Net investment income yield This is calculated in the same way as investment income yield but includes the cost of hedging.

Ogden discount rate The discount rate set by the Lord Chancellor and used by courts to calculate lump sum awards in bodily injury cases.

Operating expenses These are the expenses relating to business activities excluding restructuring and one-off costs.

Operating profitThe pre-tax profit that the Group’s activities generate, including insurance and investment activity but excluding finance costs, restructuring and one-off costs.

Periodic payment order (“PPO”)These are claims payments as awarded under the Courts Act 2003. PPOs are used to settle some large personal injury claims. They generally provide a lump-sum award plus inflation-linked annual payments to claimants who require long-term care.

Prudential Regulation Authority (“PRA”)

The PRA is a part of the Bank of England. It is responsible for regulating and supervising insurers and financial institutions in the UK.

Reinsurance Contractual arrangements where the Group transfers part or all of the accepted insurance risk to another insurer.

Glossary of terms

57

Term Definition

Reserves Funds that have been set aside to meet outstanding insurance claims and IBNR claims.

Restructuring costsThese are costs incurred in respect of the business activities where the Group has a constructive obligation to restructure its activities.

Return on equityThis is calculated by dividing the profit attributable to the owners of the Company after deduction of the Tier 1 coupon payments by average shareholders’ equity for the period.

Return on tangible equity (“RoTE”)This is adjusted profit after tax divided by the Group’s average shareholders’ equity less goodwill and other intangible assets.Profit after tax is adjusted to exclude restructuring and one-off costs and to include the Tier 1 coupon payments dividend. It is stated after charging tax using the UK standard rate of 19% (

Solvency II

The capital adequacy regime for the European insurance industry, which became effective on 1 January 2016. It establishes capital requirements and risk management standards. It comprises three pillars: Pillar I, which sets out capital requirements for an insurer; Pillar II, which focuses on systems of governance; and Pillar III, which deals with disclosurerequirements.

Solvency capital ratio The ratio of Solvency II own funds to the solvency capital requirement.

Tangible equityThis shows the equity excluding Tier 1 notes and intangible assets for comparability with companies who have not acquired businesses or capitalised intangible assets.

Tangible net assets pershare

This shows the equity excluding Tier 1 notes and intangible assets per share for comparability with companies who have not acquired businesses or capitalised intangible assets.

Underwriting resultprofit / (loss)

The profit or loss from operational activities, excluding investment return and other operating income. It is calculated as net earned premium less net insurance claims and total expenses, excluding restructing and other one-off costs.

Investor relations contacts

58

Paul Smith

Director of Investor Relations

[email protected]

+44 (0) 1651 831756

Louise Calver

Investor Relations Manager

[email protected]

+44 (0) 1651 832877

Jen Ramsey

Investor Relations Co-ordinator

[email protected]

+44 (0) 1651 831451

DisclaimerForward-looking statements

Certain information contained in this document, including any information as to the Group’s strategy, plans or future financial or operating performance, constitutes “forward-looking statements”. These forward-looking statements may be identified by the use of forward-looking terminology, including the terms “aims”, “ambition”, “anticipates”, “aspire”, “believes”, “continue”, “could”, “estimates”, “expects”, “guidance”, “intends”, “may”, “mission”, “outlook”, “over the medium term”, “plans”, “predicts”, “projects”, “propositions”, “seeks”, “should”, “strategy”, “targets” or “will” or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in several places throughout this document and include statements regarding the intentions, beliefs or current expectations of the Directors concerning, among other things: the Group’s results of operations, financial condition, prospects, growth, strategies and the industry in which the Group operates. Examples of forward-looking statements include financial targets and guidance which are contained in this document specifically with respect to the return on tangible equity, solvency capital ratio, the Group’s combined operating ratio, percentage targets for current year contribution to operating profit, prior-year reserve releases, cost reduction, reductions in expense and commission ratios, investment income yield, net realised and unrealised gains, capital expenditure and risk appetite range. By their nature, all forward-looking statements involve risk and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and/or are beyond the Group’s control.

Forward-looking statements are not guaranteeing future performance. The Group’s actual results of operations, financial condition and the development of the business sector in which the Group operates may differ materially from those suggested by the forward-looking statements contained in this document, for example directly or indirectly as a result of, but not limited to:

• United Kingdom (“UK”) domestic and global economic business conditions; • the outcome of discussions between the UK and the European Union (“EU”) regarding the terms, following Brexit, of any future trading and other relationships between the

UK and the EU; • the terms of future trading and other relationships between the UK and other countries following Brexit; • market-related risks such as fluctuations in interest rates and exchange rates; • the policies and actions of regulatory authorities (including changes related to capital and solvency requirements or the Ogden discount rate or rates); • the impact of competition, currency changes, inflation and deflation;• the timing impact and other uncertainties of future acquisitions, disposals, partnership arrangements, joint ventures or combinations within relevant industries; and • the impact of tax and other legislation and other regulation in the jurisdictions in which the Group and its affiliates operate.

In addition, even if the Group’s actual results of operations, financial condition and the development of the business sector in which the Group operates are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods.The forward-looking statements contained in this document reflect knowledge and information available as of the date of preparation of this document. The Group and the Directors expressly disclaim any obligations or undertaking to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise, unless required to do so by applicable law or regulation. Nothing in this document constitutes or should be construed as a profit forecast.Neither the content of Direct Line Group’s website nor the content of any other website accessible from hyperlinks on the Group’s website is incorporated into, or forms part of, this document.

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